How Brexit shapes Philip Hammond's public spending plans

The FT's economics editor Chris Giles looks at the revised forecasts from the UK chancellor's Spring Statement on economic growth and the public finances, and says Brexit will determine how much is available to bolster an increase in public spending

Filmed by Petros Gioumpasis. Graphics by Russell Birkett. Produced by Josh de la Mare.

Transcript

This year's Spring Statement, one of chancellor's two times in the year he gives an update on the UK economy. Showed weaker growth, weaker performance in the short term but better public finances. And that left Mr Hammond able to promise goodies ahead so long as the Brexit deal was passed by the House of Commons. Let's get into some more detail.

On economic performance, on growth, the 2019 forecast has been revised down from 1.6 per cent to 1.2 per cent. That's a pretty low figure for the UK, about as bad as it's been at any time since the financial crisis. But in the subsequent years, there's been slight upward revisions leaving the economy in roughly the same position as we thought in the previous set of forecasts last October, roughly 1.5 per cent, 1.6 per cent growth a year after a slow growth year this year. 1.5 per cent - not a great number compared with Britain's historic average of about 2.5 per cent, but still not a disaster.

Turning to the public finances, the news is much better. In every year of the forecast, the deficit has been revised down mostly because income tax revenues have been coming into the exchequer faster than expected. This means that we're going to have a deficit in the tens, in the teens of billions in the next few years compared with $153bn in 2009, 2010. That's just an enormous improvement we've seen in the public deficit over the past decade.

However, that big period of high borrowing does mean that public debt has risen from around 40 per cent of national income to around 80 per cent of national income. And even though it's coming down and forecast to come down to about 73 per cent in five years' time, that is still, as far as the government is concerned, a worryingly high level of public debt. So what are the options for the chancellor. Mr Hammond?

Well, it really depends on Brexit first of all. If we have a smooth Brexit, then he says he has options to decide whether to increase public spending, cut tax, or increase public investment. If we have a very messy, disruptive Brexit, he says he will have to use the better news on the public finances to mitigate the consequences of a disruptive no-deal. So that's the big immediate choice.

Assuming things are rather smooth, then the question really is for the autumn, how much does Mr Hammond want to improve public services? How much is he going to end the austerity period where day-to-day public spending has been very, very, growing very much slower than it did in the past? And how much does he want to put into public investment where he's already spent a lot of money? Or will his party want tax cuts? And can he do all of this while keeping debt falling?

That's the trade-off. The more he spends, assuming Brexit goes well, the less slower debt will fall. My own view is he is a pragmatic chancellor. He will take a balanced approach. He'll do a little bit of everything. It's clear that he will increase spending on schools, police, defence - where there's real pressures at the moment. But also, he really likes public investment. He thinks infrastructure and spending money on capital projects is the way to improve the long-term growth rate of the economy.

And Mr Hammond is still a fiscal conservative. So he will not spend so much money that in the end you don't have public debt falling. So he will be absolutely insistent that that is the constraint on how much he can spend. Public debt will still have to fall. But that does mean there should be some money left over.